ET BureauConsolidation is expected to be the underlying theme in 2017, with the country's risk-capital operators continuing to realign their portfolios

ET Bureau

Updated: December 30, 2016, 15:19 IST

It has been a rollercoaster ride for Indian startups this year as they battled a funding crunch and dipping valuations after heady days of the past two years.

ET takes a look at what the new year holds for companies across sectors from online retail to financial technology, venture capital, online media & entertainment, software-as-a-service, cybersecurity and mergers & acquisitions.

The Money angle: No Big Bang

Consolidation is expected to be the underlying theme in 2017, with the country's risk-capital operators continuing to realign their portfolios and search for exit opportunities. Investors do not expect a turnaround in the pace of deal-making next year in spite of an increasing amount of dry capital--estimated at about $15 billion, according to Venture Intelligence.

“2017 will be a year of consolidation, and post that it will depend on how the organic market grows. Funds and strategic investors, across stages, are not yet back with a bang,"said Niren Shah, managing director, Norwest Venture Partners India.

A possible touch point for investors and startups is the anticipated new fundraising rounds by India's billion-dollar startups, especially Flipkart, Ola and Snapdeal. However, all the three companies, which have raised billions in equity financing over the last few years, are struggling to secure capital at higher valuations, leading to concerns that any new fundraising will be at sizably lower numbers.

“Everyone is waiting for the fundraising rounds of the big startups to take place, which seems to be increasingly difficult and may not actually take place at the levels that were anticipated,"an investor told ET on condition of anonymity.“Nobody's really talking about it, but everyone is very disappointed at how the market has played out so far.“

Double or none

The consensus among industry operators is that investors will be undertaking a culling of their portfolios while doubling down investments on a chosen few. This will coincide with a number of funds reaching the end of their 10-year lifecycles.

“Every fund that is reaching the 10 year mark will have to start thinking about exits,"said Alok Goel, managing director, SAIF Partners. “At the end of the day, a fund is only as good as the amount of money it returns (to its limited partners, or investors).That's how LPs measure the quality of a fund.“

There has been no shortage of new funds being launched this year.

Accel Partners, an early backer of Flipkart, closed its fifth and largest fund of $450 million this month. Lightbox closed a new expansion fund estimated at about $54 million but is expected to deploy a significant portion of this money in backing its existing portfolio companies, a list that includes Faasos, Furlenco, Droom, Melorra and Embibe.

“While there is a lot of dry capital, it may not be representative of the potential level of activity in 2017,"NVP's Shah said. “The current challenge is that angel and Series-A (investments) have slowed down, especially since Series B and C rounds have reduced considerably. Most funds seem to be focused on directing capital towards their best portfolio companies.“

One sector that promises to hit the ground running, jumping and leaping in 2017 is undeniably financial technology, or fintech.While there are several developments to watch for in this space, such as more payment banks becoming operational, industry experts highlight broader trends for the coming year.

As investor Mohandas Pai puts it, 2017 will be a “year of transformation"for fintech, marked by keener competition, more technology innovation and deeper internet connectivity. Interoperability will become crucial and islands of fintech offerings will sink, say experts, which casts doubt on the model of mobile wallets.

Will wallets wane or win?

There is a whole spectrum of opinion on what 2017 looks like for mobile wallets given the gaining prominence of the government-backed unified payments interface, or UPI. The government will shortly launch an UPI app that people can use to transact across banks.

Some experts say digital wallets have to tweak their business model to remain relevant. “Mobile wallets are history,"said Pai, an investor in fintech startups ToneTag and Faircent. “The give-away signs are that the biggest wallet player (Paytm) is getting into payment banking. UPI is also a game-changer with almost no costs, and is fit for India."

Tokenisation will be the big thing in fin-tech in 2017, says TR Ramachandran, group country manager for India and South Asia at payments network Visa. Tokenisation entails turning credit and debit card details and credentials into digital tokens, which will then be passed from one platform to another during digital payments instead of the card details.

Opportunities galore

The big opportunity for fin-tech players lies in selling technologies and services to banks. “There is a disruption taking place in the Indian banking sector. Startups can leverage this to offer payment and lending services to consumers and small businesses,"said Sharma.“Others startups can be arm-merchants to incumbent banks.“

Online lending will also become big as more people and merchants transact online creating digital footprints. As fintech expert Sanjay Swamy of Prime Venture Partners puts it, “Data is the currency of the future.“

Bitcoin startups, too, can expect to ride the momentum and wider acceptance gained following global uncertainties this year.

Indian online retail: Big test year

As the New Year beckons, the big question for India's online retail industry is whether fast-paced growth will return?

If so, what will drive such a comeback after the slowdown of 2016? The big question that will need to be answered is that if the market will live up to bullish projections made for it by Wall Street banks, or will it disappoint (see graphic).

Increasingly online marketplaces will turn to categories that drive repeat purchases like groceries, they will seek to integrate options that allow customers to buy both offline and online, termed as omni-channel strategies and brace for the entry of Asian giants like China's Alibaba or Japan's Rakuten.

Buyouts will be the norm for the industry where about half a dozen players are in the fray including the top three ­ Flipkart, Amazon and Snapdeal.

The online retail market stood at $14-16 billion at the end of 2016 from about $11 billion in 2015. The online retail market only grew by 15% in 2016 to $14.5 billion, according to internet consulting firm RedSeer.

This slowdown in growth during 2016 can be attributed to several factors, like change in government policy, reduction of discounts and more recently demonetisation say investors and analysts.

Rival Amazon saw its shipments in India grow by 100% in 2016 down from the 250% increase it registered in the previous year, admittedly on a much smaller base.

But e-tailers say they have recovered from these obstacles, an executive in a top e-commerce company estimates the industry will grow at 40% in 2017. Investors though are more circumspect and believe growth will pick up only in the final quarter due to the impact of demonetisation.

E-commerce companies will also have to now attune themselves to the needs of the next 200 million customers they have to acquire. “Needs of the top 10-15 million ( is similar) to consumers in the West as they have more money than time.But for the next 200 million, the core need is more value than time,"said Flipkart CEO Binny Bansal in an interview earlier this month.

To attract such buyers, Flipkart has lined up initiatives like no-cost EMIs, product exchange and private labels. Amazon on the other hand has been betting big on its push into daily essentials, which includes lower-ticket size FMCG and grocery products.

For vertical e-tailers, where leaders in most categories have already emerged, 2017 will be test of their omni-channel strategies.

Media and entertainment: More fun

Video-on-demand providers, media startups and gaming companies will dominate the digital media and entertainment industry. The explosion of platforms has thrown up different ways of bundling and disseminating content through smartphones.

While media and entertainment startups acquired millions of users this year, increasing monetization through advertisements will be the big focus in 2017.

Getting users to pay

“Digital ad spends will increase and even more subscribers will come, though not a very high number. But they will pay for premium content,"predicted Ajay Shah, partner--media and entertainment, transaction advisory services, at EY. “One can expect a CAGR (growth rate) of at least 50% in digital ad spends over the next two years, largely contributed by video-on-demand and media startups.“

Jehil Thakker, media and entertainment head at KPMG, says it will be hard says it will be hard to get users to pay. “Indian users will not spend very easily, so innovative ways of monetisation should emerge in 2017,"he said.

Investments to keep flowing

Experts predict investments will continue to pour into the sector.Amazon Prime is investing Rs 2,000 crore in its Indian video streaming unit. This year, venture-funding in the media and content sector adds up to about $35 million with key deals like China's ByteDance backed Dailyhunt and Tiger Global backed TVF.

“One can't expect to see too many new investments in up and coming players, but existing players will continue to put in more money to ensure users stick,"said Shah. “They will focus on increasing personalization and interactivity for users through technology upgradations while depending on ad-based revenue to pick up.“